9-25-15 Alaska’s Governor Issues Bombshell Gasline Report

YOU READ ALASKA GOVERNOR BILL WALKER'S ANNOUNCEMENTS HERE FIRST, YESTERDAY

  BELOW IS TODAY'S UPDATE 

(Scheduled for completion this weekend)

The Governor's Bombshell

Commentary by

Dave Harbour

We call Governor Bill Walker's actions this week a 'bombshell' because just as they create a new relationship with Alaska's largest investors so do they change Alaska's reputation as an investment destination.  While the Governor has created "change he surely hopes Alaskans will believe in", at the same time, he has destroyed Alaska's attempt over the last few years to make itself more attractive to investors.

Here is, 1) what the Governor did and, 2) how we react to those actions after nearly 45 years of experience in Alaska as a regulator, educator, journalist, small business owner, municipal employee, oil industry executive and non-profit sector volunteer.

What The Governor Did

• Alaska Governor released a "Summary Report on the Review of the Alaska LNG Project Process"
• The "review" should be read in context of his very personal transmittal  letter sent to legislators.
• Above is a video he released yesterday.
• Here is a bearish oil price report provided by the Governor
• Here is the Governor's proclamation calling for a special session to, among other things, establish a 'reserves tax' on industry investors applying to gas that is available but not committed to a market.
• Here is the Governor's news release, discussing the above actions.
• Alex DeMarban's ADN review of events.
• We think Alaska's leaders may sometimes forget that sophisticated observers are watching, from all over the world!  Here's an example, our Australian oil and gas industry analyst friend who is quite candid about his view of Alaskan leadership and its LNG project.
• Here is our recent and highly relevant review of the Alaska investment climate.

Our Reaction To What The Governor Did

General.  Governor Walker assumed office knowing the economic challenges were awesome.  

Oil prices ranged at half the level the state operating budget required and that operating budget, in turn, was 90% dependent on Prudhoe Bay oil production.  The entire economy of Alaska is over a third dependent on this sole source of income.  Annual deficits of $3.5 – $5 billion will deplete the state's available savings within two – three years depending on the level of spending cuts politicians are ready to approve.  Still, an almost $10 billion state employee retirement program unfunded liability awaits full funding.

Alaska's oil income flows from a 1/8 royalty share of the oil; a discriminatory, statewide 20 mil oil and gas property tax; one of the highest production (i.e. 'severance') taxes in the free world; and, a corporate income tax.

While the royalty rate was one of the lease terms agreed upon during the famous 1969 Prudhoe Bay lease sale, the bulk of oil taxation was added after the lease holders began making their massive investment in developing the ANS reservoirs and building TAPS.  For the dozen years following the lease sale, taxes were increased about a dozen times.  At least twice in Alaska's history, higher tax rates were applied retroactively for the sole purpose of clawing into state coffers, more money. 

While Alaska got away with its unfair and predatory taxation for a long time, even the great and prolific Prudhoe Bay reserves would dwindle, age and continue need massive reinvestment in order to spawn new production.  The trouble is that with the highest oil taxes in the free world, Alaska's political leadership had created the highest per capita taxing authority in America, the highest debt per capita state in the nation characterized by some of the most lavish social programs devised by man.  Alaska even has more non-profit organizations per capita than any other state.

In the early 1990s, Dr. Scott Goldsmith (NGP Photo) of the state university's Institute of Social and Economic Research began warning that if Alaska were to begin slowly cutting the growth of spending its economy could arrive at a "soft landing", meaning a sustainable, long term economy.

Common Sense for Alaska, a public interest non-profit organization, sponsored government-spending conferences leading to powerful recommendations for a constitutional amendment limiting government spending increases to an inflation/population formula.  

All public officials paid lip service to both Dr. Goldsmith's warnings and Common Sense's recommendations, to no effect.  Spending continued to explode.

Alaskan apologists justified their high oil taxes and high spending in this way: "We are a large state with a small population and our cost of living is higher than elsewhere; therefore, it costs more for us to maintain government services."

Problem with that argument is that no matter how much a person, family or government wants to spend more money, one simply can't spend more than one brings in without sacrificing credit worthiness.  (Of course, the Federal government has shown that it can spend over $18 trillion more than it takes in, but even its citizens pay for its irresponsibility when, ultimately, inflation devalues the currency)  Recently the rating agencies, as we have long predicted, began putting Alaska on notice that its cost of borrowing is likely to increase since its economic risks have now become too large for analysts to ignore.  

In addition to the low price era in which Walker finds himself, production has been steadily declining for years at a 5-7% rate.  

In the mid 80s, Alaska produced over 2 million barrels per day to feed about a fifth of America's domestic oil needs.  The Trans Alaska Pipeline System (TAPS) which transports Alaska North Slope (ANS) oil to tidewater now operates at only about a quarter of its capacity.  Nearly three-quarters empty is another way to put it.

Governor's Background.   Governor Bill Walker was born, raised and spent most of his life in the state.   We believe that many who know him would agree he is a gifted public speaker with charismatic qualities.  He knows the state well.  

These attributes would benefit one's role as governor.

But being governor of a State dependent on oil investment requires a studied, wise, world view of the opportunities, the competition, the alliances leading to a successful term of office.

As a lawyer, much of his professional background, counter-intuitively, dealt with politics and marketing.   He held elective posts in Valdez, site of the major, 1989 oil spill, and served as the general counsel and major marketer of a municipally-owned authority.  

The Alaska Gasline Port Authority (AGPA) was designed to promote (i.e. and then finance, build and own) a gas pipeline/LNG export project.  

During this time, Walker continually criticized other parties (i.e. like the oil industry) for not cooperating with AGPA's or predecessor LNG project efforts.   

An observer might conclude Walker's AGPA was never successful for logical reasons:  1) From the early 80s to the late 90s, the Lower 48 gas price was too low to support any project and the world LNG trade was in its infancy.  2) During the years, before the shale phenomenon, when the Lower 48 needed Alaskan gas, the most economical way to monetize ANS gas was to send it by pipeline directly down to those markets, and not to try to send it via tankers to Asian markets.  3) When the shale revolution produced massive gas supply for North American markets, Asia looked more promising, especially after the Nakashima tragedy in Japan lessened interest in Nuclear power and increased interest in natural gas fired power plants.  At that point, the major gas owners rather quickly shifted their sights to Asia and with ample expertise and contacts had no need for a 'middle man' like AGPA to market their gas.  

Others may view it differently, but this scenario provides a very understandable backdrop for this governor's 'Alaska-centric' judgment and decision making.  

While his AGPA attempts failed to monetize ANS gas, now he is governor and, again, he may be viewing the oil companies as roadblocks when, in fact, their diligent efforts have brought an ANS gas monetization project farther forward than ever before.

We believe it ironic that Walker's zeal to be the man at the helm of an LNG project may, in fact, be clouding his judgment and sabatoging the project.  

Insisting on certain state control of and equity in a mega project perverts the private enterprise system to begin with.  Then, to be criticizing the investors, refusing to talk about a comprehensive fiscal security package for them and threatening them with a gas reserves tax radiates a hostility sufficient to dampen the ardor of any Alaska investor, current or potential.

In fact, we would be not the least surprised to someday read an announcement from one or more producers to the effect that, "The governor has indicated his desire to own and operate an ANS gas pipeline/LNG system.  We respect that desire and, accordingly, are withdrawing from our plan to construct such a project.  Instead, we stand ready to sell the state the research and planning material we have developed and will support the governor's efforts in any reasonable way.  Our efforts had led Alaska closer than ever before to launching a successful ANS gas monetization project and we were completely on schedule with that effort, but for the governor's demand that we spend additional time and money studying a 48" pipeline alternative.  The time honored adage that, 'too many cooks spoil the soup', is as true now as it was in the old days.  Rather than face a continuingly critical state administration for what we believe has been our on-time, on-budget, good faith gas monetization effort, we conclude it prudent to transform our project support into support for the governor's state-ownership idea, whatever that turns out to be.  Meanwhile, we shall shift the majority of our focus now on investing in expanded throughput of TAPS, upon which the state government and the people of Alaska depend."

Please check back this weekend; much more coming….

Can Alaska be a place where a deal is a deal?

We detest intergenerational inequity

Alaska Gas Pipeline Commentary

FRIDAY'S EARLY REPORT: MORE TO COME, INCLUDING OUR VIEW OF WHY WE CHARACTERIZE THE GOVERNOR'S RELEASE ON THURSDAY AS A BOMBSHELL REPORT (I.E. NOT MEANT AS AN ENDORSEMENT.)  MEANWHILE, WE WANTED YOU TO HAVE THIS MATERIAL AS SOON AS POSSIBLE.  PLEASE REVIEW IT AND DEVELOP YOUR OWN REASONED PERSPECTIVE.  -DH

Reference: Governor Bill Walker's transmittal letter to Legislators

Reference: Governor Bill Walker's, "Summary Report on the Review of the Alaska LNG Project Process"

We will provide our dear readers with commentary later in the day on Friday.

Here is the copy of an email alert we also issued Thursday on this subject: